Countless startup ideas are hatched between friends, colleagues, college roommates, and family members. A late night discussion between two friends can turn into the next social network or mobile ad platform.
These relationships can be great breeding grounds for new ideas and innovation, but navigating business management with friends or family members can also be tricky. It may be tempting to rush forward without anything in writing: after all, you know each other so well, you both want the same thing for your business, why waste time with the formalities?
While you may agree on everything today, issues will inevitably emerge…maybe a friend gets married and decides it’s time to go back ‘to the office.’ Maybe you’ll disagree overcompensation or whether to spend your whole marketing budget launching at a conference.
Having some kind of partnership agreement in place from the start can be a helpful starting point to figure out any issues that arise down the road. It doesn’t need to be a fancy document, but your basic discussions should include four things:
Who’s contributing what
It’s critical to discuss what you and your partner will be bringing to the table in terms of labor, time, cash, property, customers, etc. Do you plan on working on the business full-time, part-time, etc.? How much will each party be investing in terms of cash? Will you be using someone’s garage for storage space? Is your colleague bringing her former clients over to the new business? By discussing all contributions (no matter how small), you can help avoid the risk of one member feeling like their work is going unnoticed.
What’s the value of these contributions (aka: who gets paid what)
A partnership agreement needs to outline how profits will be distributed. Will each partner be paid a salary for his or her role in the business? How much? What about extra profits? If you each own 50 percent of the business, should extra profits be split 50-50? Or should it be based on the level or contribution that year?
Money is always a sticky subject and you and your partners may have different financial needs and different ideas on how the money should be divided. Talk about money matters upfront, and you may even want to specify the partner agreement be revised on an annual or bi-annual basis.
How will decisions get made
While many would assume that major disagreements among partners always revolve around money matters, in many cases decision-making and individual authority are the real culprits. At the beginning, everyone usually wants to have a say in everything. After all, you probably left a salaried job to have more autonomy.
When setting up your business, decide what type of decisions require unanimous votes, and what type of daily decisions can be made by a single partner. It’s also wise to stipulate who can make decisions on what. There’s no single model that will work for every business and every partner relationship. Discuss these matters upfront and decide what decision-making structure will let your business run the most effectively while making sure that no one feels left behind.
How can you terminate the agreement
While the idea of walking away from the business may seem far-fetched at the beginning, it’s important to discuss what happens if plans, dreams, or circumstances change. What happens if one partner wants to leave the business? Does the company go on? Who will own the trademarks or other intellectual property?
You might think that diving into these potentially awkward conversations will dampen the excitement of creating a business. However, if your relationship can’t withstand working through such details on day one, how will it weather the inevitable issues that come up during the course of running a business?
Discuss these issues upfront, and put everything in writing so you can always have a reference. A quick Google search for “partner agreement template” yields countless partnership agreements you can use. For example, Business-In-A-Box offers a basic template, or check out Wiki-How to learn how to write your own contract. A little administrative work at the start can save you from major headaches and potential legal battles down the road.
Editor’s Note: This was originally written by Nellie Akalp for Mashable.